Why does the SEC, which has clearly classified more than a dozen tokens as securities, continue to evade ETH?

The U.S. Securities and Exchange Commission (SEC) recently shocked the crypto industry by filing a lawsuit against Binance.

Binance faces 13 different charges. The more important ones that may have a long-term adverse impact on Binance include: mixing customer assets with its own assets, allowing US customers to use Binance Globe, and using virtual transactions to deliberately increase the platform trading volume of Binance.US.

Complaint: https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-101.pdf

Binance has responded to the lawsuit: https://www.binance.com/en/blog/ecosystem/sec-complaint-aims-to-unilaterally-define-crypto-market-structure-8707489117122437402

Notably, the SEC explicitly stated in its lawsuit that it considers many of the tokens listed on Binance to be “unregistered securities,” including but not limited to Solana (SOL), Cardano (ADA), Polygon (MATIC), Coti (COTI), Algorand (ALGO), Filecoin (FIL), Cosmos (ATOM), Sandbox (SAND), Axie Infinity (AXS), and Decentraland (MANA).

While this is the clearest language the SEC has used to date in clarifying its determination of “unregistered securities,” it once again avoids answering an important question: Is Ethereum (ETH) a security? If so, why is the SEC silent on this? If not, what exactly is Ethereum?

From Cryptocurrencies to “Crypto-Securities”

The SEC’s argument for designating the above-mentioned tokens as “crypto-asset securities” is laid out in Section 8 of the indictment (pages 85 to 123), which analyzes each project in turn. It is clear that they have a similar pattern: the process of the initial coin offering (ICO), the ownership of the tokens, the allocation to the core team, and the promotion of profit generation through the ownership of these tokens.

However, Ethereum, which also follows the above pattern, is not among them. SEC Chairman Gensler has been vague on whether Ethereum and its anchored coins (such as WETH) are securities. ETH is often held as an investment, which suggests that it can be classified as a security, but it is also widely used as a medium of exchange across daily protocols, making it function more like cash.

Gensler has previously said that “all cryptocurrencies other than Bitcoin” in the crypto market could be considered securities, but he declined to specifically address Ethereum. When asked if Ethereum is a security, Gensler typically does not answer.

It’s curious that the SEC is so reluctant to clearly categorize ETH when it’s so eager to make the same request for other tokens. Why?

Is ETH a security in the eyes of the SEC?

This may be an issue of debate within the US government.

Ethereum may fall under the jurisdiction of the U.S. Commodity Futures Trading Commission (CFTC), which has considered BTC, ETH, and USDT to be commodities rather than securities. Not only are the two categories distinct from each other, but the overlap could spark a regulatory tug-of-war, so Gensler is trying to avoid infighting within the government and take a more public stance on Ethereum.

Crypto media Protos once published an analysis that Gensler's avoidance of Ethereum may be the result of the SEC's inaction after the infamous "The DAO hack", which caused the Ethereum network to fork and put the entire ecosystem at risk. At that time, many investors were in dire straits because of this incident. However, the SEC did nothing at the time, choosing silence and inaction. Now Gensler finds himself in the embarrassing position of making up for the negligence of his predecessor. Now that the Ethereum ecosystem has spent years restoring its credibility, retroactively declaring it an unregistered security will have disastrous consequences for investors.

In other words, protecting investors in this context means protecting them from their protectors.

Another reason Gensler may be reluctant to clearly categorize Ethereum is that he may not know.

Cryptocurrencies and the blockchain technology behind them are innovative and new. They represent a fundamental shift in the way we understand finance and asset ownership, and with the development of ecosystems like Ethereum, they have introduced many entirely new use cases.

Anything new will be difficult to classify, and this is what Ethereum does - it is sufficiently "decentralized" and conforms to the "concept" of securities (investors, profit promises), which is the core of why it is difficult to regulate.

This regulatory ambiguity presents a complex challenge for Ethereum, as progress in the crypto industry depends on obtaining clear legal definitions for Layer-1 tokens, such as Ethereum, which serve as both a medium for daily transactions and an investment vehicle within their respective ecosystems. Regulatory ambiguity poses a significant obstacle, stifling potential, hindering mainstream adoption, and fostering uncertainty in an industry that is brimming with growth and innovation.

The dichotomy of cryptocurrencies (either securities or not) blurs the lines between different kinds of tokens and forces us to confront the inadequacies of existing legal structures. To move the crypto industry forward, regulators must address this delicate issue. The unique crypto industry requires equally unique rules.

The crypto industry needs meaningful regulatory progress

The path toward comprehensive cryptocurrency regulation is currently blocked by two significant obstacles that must be urgently addressed to promote the responsible development of the industry.

First, the SEC must establish a formal position on Ethereum. Given that the SEC did not act when it had the opportunity to restrict Ethereum, it inadvertently created a scenario that puts investors in a regulatory dilemma. As a protector of investors, the SEC has a responsibility to provide some form of regulatory guidance - even if it is temporary - as a starting point. The lack of clear regulation will not only be inconvenient, but also lack the necessary protection for the growing number of participants in the crypto market.

Second, open discussion about the nature of cryptocurrency is vital — dialogue without “preconceived” notions, biases, or empty rhetoric. We often talk about making room to “have a conversation,” but it’s important to acknowledge that needing to have a conversation and actually having one are two very different things. Perhaps everyone in the industry — and those who pay attention to it — would benefit from practicing the latter.